Process for Developing a Performance Based Contract (PBC)

Many years ago when preparing to teach a 1-day Performance Based Contracting (PBC) workshop it occurred to me that while we had an 8-step process for developing it wasn’t entirely accurate. In fact of the 100+ PBC that I have been fortunate enough to be involved in the overwhelming majority (80+%) of these revisited previous process steps numerous times, especially on the highly complex projects. As such, the intent of this article is to describe the general non-linear process for developing a PBC.

Firstly, based on the collective experience of my colleagues and I the process of developing a PBC is not linear. That is, completing Step 3 does not mean that you will not revisit it after completing Step 5. In fact, based on our experience a good PBC practitioner will continue to revisit and test the design and underlying assumptions of the previous steps.

Secondly, while many people will go directly to selecting performance measures as they have a good understanding of what is or could be measured, it is essential that we understand why we are using a PBC (the intent) and what behaviours we are trying to drive (the outcome). Without this, we may be driving the wrong behaviours resulting in perverse incentives.

Based on this we contend that the PBC development process is actually a spiral development process based on 3 spirals that are illustrated in Figure 1.

Figure 1 – Performance Based Contracting (PBC) Development Process


Spiral 1 – Defining the Requirements of the PBC (Requirements Definition)

The intent of spiral 1 is threefold as follows:

  1. define the scope of the PBC;
  2. define the overall environment that the PBC is operating in (e.g. how the scope of the PBC compares with the overall buyer outcome – we refer to this as the enterprise outcome which may require multiple contractors and internal buyer personnel to deliver); and
  3. what the performance (and typically cost) objectives are (e.g. defining PBC success).

The key output of spiral 1 is a deep understanding and an agreed description of what the desired outcome is, including the enterprise outcome. In our experience, highly successful PBCs are very clear about their definition of success (requirements), which is then linked to various rewards and remedies (consequences). Importantly, if spiral 1 is not completed, we fall into a common pitfall; measuring what we have always measured with little to no consideration of what behaviour we are trying to drive and why.

Spiral 2 – Initial Design of the PBC (Initial Design)

Following on and using the results from spiral 1, the intent of spiral 2 is twofold as follows:

  1. develop, capture, and refine a list of candidate performance measures to ensure that the draft set of performance measures are necessary (not too many) and sufficient (not too few) given the contractual scope of work; and
  2. define the initial list of rewards and remedies (consequences) that the candidate performance measures are linked to.

The key output of spiral 2 is a draft performance management hierarchy that can be defined as a system of performance measures that represent both the PBC and overall enterprise outcome through a number of performance measures representing each Key Result Area (KRA) at one of three performance measure levels (e.g. Strategic Performance Measures (SPMs), Key Performance Indicators (SHIs) and System Health Indicators (SHIs)). See a previous article on XX for more information on the types of performance measures that are available to PBC practitioners.

It is strongly recommended that detailed drafting of the candidate performance measures, including business rules, performance levels, etc., not be undertaken until the draft performance management hierarchy is agreed to. In our experience completing detailed drafting of performance measures until the whole draft performance management hierarchy is agreed to can often result in significant re-work if alternate performance measures are desired.

Spiral 3 – Detailed Design of the PBC (Detailed Design)

The intent of spiral 3 is, based on the draft performance management hierarchy from spiral 2, to develop a completed project specific Performance Management Framework (PMF) including all relevant performance clauses within conditions of contract, statement of work, payment, glossary, etc. Importantly, as part of finalising the performance measures the PBC practitioner will need to develop the following for each performance measure:

  1. performance levels including, if necessary, define an averaging methodology (see previous articles Setting the Performance Part 1,  Part 2 and Part 3);
  2. specific business rules (sometimes referred to as ground rules and assumption (GR&A) to include/exclude specific contract events (e.g. third party interference));
  3. if there a multiple performance measures, determine the individual performance measure weighting (see previous article Performance Measure Weighting);
  4. whether specific remedies will apply (e.g. Stop Payment and Termination events), and if so, how many occurrences before they apply;
  5. whether an Award Term/Rolling Wave incentive will apply;
  6. consequence on price including when to apply to the At-Risk Amount (ARA) (e.g. per event, per performance period, per year); and
  7. implication of performance reporting on general contract management reporting.

The key output of spiral 3 is a first draft of the suite of documents that collectively make up the PMF.

In summary, using the spiral development process illustrated in Figure 1 will result in an better PBC that more accurately represents the required outcome, which is developed in quicker time with less resources and re-work. And who doesn’t want that result!

This entry was posted in Behaviours, Outcome, Performance Measure, the How and tagged , , , , , , , . Bookmark the permalink.

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